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Operational and production managers, however, rely upon the CEO to provide the leadership and the entity-wide communication needed to foster an integrated internal control framework. The governing board, like the CEO, shapes the organizations tone at the top by demonstrating integrity, honesty and ethical behavior in its handling of decisions and sensitive issues. Finance officers and managers support the internal control initiatives of the CEO and the governing board in daily operations. All levels of management must work together to create an integrated framework that lowers risk to an acceptable level and assists the organization in meeting its goals and objectives.
The Committee of Sponsoring Organizations (COSO) of the Treadway Commission is a voluntary, private-sector initiative dedicated to improving the quality of financial reporting through ethics, effective internal controls and corporate governance. COSO is sponsored and funded by five major professional accounting associations and institutes. In 1992, COSO issued a report entitled Internal Control - Integrated Framework, which defined and changed the way internal controls were viewed. The COSO framework considers not only the evaluation of hard controls, such as segregation of duties, but also soft controls, such as the competence and professionalism of employees. The COSO report presented a common definition of internal control and identified five key elements of a successful internal control framework. The COSO model is widely recognized as the industry standard against which organizations measure the effectiveness of their systems of internal control. The COSO framework also established the criteria used by government and other external auditors to assess the effectiveness of internal controls established by local governments.
The five interrelated elements of an internal control framework, as identified by the COSO report, are:.